To state the obvious, the Coronavirus (“COVID-19”) has pushed us to a nation and state of emergency and our country is in a lock-down mode with strict stay at home orders. The news and statistics show that this isn’t ending anytime soon and more than likely can last a few months, not weeks. During times like this, it becomes more difficult deciding where to invest. As a dividend investor, many companies (such as Bed Bath & Beyond (BBY), Nordstrom (JWN), Occidental Petroleum (OXY) and Delta (DAL)) have either cut, suspended, postponed or reduced their dividend. One industry that does well during times like this are your liquor/beer company, and that includes the likes of Constellation Brands (STZ).
As the stay at home orders are in effect, beer and wine sales have skyrocketed. They have jumped as much as 55% during the week of March 21st, from Nielson. This industry really is showing casing that they are recession proof and why they still deserve to be on this list, a list that CNBC even put out back in 2020. There are many popular brands out there and one tends to stick to the brand you enjoy. Constellation Brands has a few names that you reach for and that you remain loyal to. I know this first hand, as my father-in-law only drinks Corona/Corona Light/Corona premier. I know that he is not the only one, too.
Now that Constellation recently released their 4th quarter earnings, which ended in February 2020, the question is – how will they perform in March and going forward?
Given that results and releases have come out stating large/substantial increases across the board in beer, liquor and spirit sales, one would naturally assume performance will… improve during these months. Even their CEO stated, “Given that 85% to 90% of our business across all three sectors is done in the off premise, it really works to our advantage, to some degree,” during his interview with Jim Cramer on Mad Money.
Constellation had $1.9 billion of net sales for the quarter that ended in February. We are seeing stats of the 40-60% increase in sales across the industry, per Nielson, but I am not going to apply that increase to Constellation, in full. To take a conservative approach, I will argue that their sales will increase 15% from 3/1-5/31 – given families are stock piling heavily and that grocery stores will be churning inventory on a rapid pace. This would put constellation with net sales of approximately $2.2 billion and – keeping all factors consistent would equate to a net income for the quarter (projection) of $458 million.
Constellation also shows liquidity in their release, with current assets far exceeding current liabilities with long-term debt actually decreasing. Even when you take out inventory, their quick ratio is almost a 1:1.
During this time period, Constellation’s stock price has also dropped 30.3% year-to-date and 38% from their 52 week high. This leads into the review to see if they are now undervalued and if this is a stock to own during the downturn thanks to COVID-19. It’s time to put Constellation through our Dividend Diplomat Stock Screener.
Dividend Diplomats Stock Screener
Being a dividend investor, I also am concerned about valuation, payout ratio and dividend yield, with dividend growth. These 4 metrics will help in my determination if STZ is an undervalued stock for my dividend portfolio. STZ will have to have:
- Below 15 Price to Earnings (P/E) ratio
- Below 60% payout ratio
- Yield above 2.25% (S&P 500 yield)
- Dividend growth rate above 7.00% (overall market dividend growth rate, on average).
|Stock Price*||Dividend||Forward EPS**||Dividend Yield||Payout Ratio||3-Year Growth Rate||5-Year Growth Rate||P/E Ratio|
*Based on 4/3/2020 Close
**Based on Yahoo! Finance
1. The Price to Earnings (P/E) Ratio: STZ isn’t doing too bad in this metric. They are right at the 15 p/e I wanted to see, which is below the S&P 500 and they’ve really come down in price helping this metric look better. I anticipate this to drop lower, as market conditions are anticipating further deterioration in market prices.
2.) Payout Ratio: Far below 60%, sitting at 35%. This means that STZ retains 65% of earnings for the business and sends 35% of earnings back to shareholders, in the form of a dividend. No cut risk with that type of payout ratio, which is crucial during this volatile time.
3.) Dividend Yield: The yield JUST squeaks by my required yield of 2.25% (S&P 500 average yield), at 2.27%. Similarly, their price has decreased tremendously and this has helped the yield increase. However, as stated in #1, I believe we still have price compression coming and this yield may continue to grow, because of it.
4.) Dividend Growth: STZ has only paid and increased their dividend for approximately 5 years, starting in 2015. Therefore, they’ve increased the dividend 4 times. I anticipate low dividend growth this year, due to the pandemic, but that once this clears up, they will be back firing in double digit dividend increases that we have seen. STZ doesn’t have the history or longevity, yet, that I typically like to see.
Constellation Brands Summary & Conclusion
We are in a very tragic situation, but Constellation Brands is here for us. During crisis times, beer/wine/liquor does quite well and the evidence is already seen & noticed this go around, as well. Constellation displayed a strong 4th quarter and that was BEFORE the pandemic really broke out here in North America. Due to all of the research and releases on the growth, Constellation will weather this pandemic and perform quite well.
Furthermore, they are now at least 30% cheaper than where they were 3+ months ago and are down almost 40% from their highs. Constellation serves the reputable brands, but had historically higher price to earnings ratio, leading to being difficult to purchase their stock at times (especially with a higher price, the yield was always quite low in the ~1% range).
Now that they are yielding above market, have loyal brands and have improved performance, with an industry demonstration that they will excel, the time may be right to acquire this stock.
Therefore, at current prices, I would be interested to not only adding their brands to my refrigerator – but also to adding their stock to my dividend growth portfolio.
As always – stay safe, healthy and – good luck, happy investing everyone.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in STZ over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.